What is a Debt Consolidation Program?

Do you have debt from credit cards, medical bills, personal loans and other places? If so, you may be overwhelmed and looking for a way to repay all your debt and take control of your finances. After all, it can be very difficult to juggle multiple debts and due dates. That’s where a debt consolidation program comes in. These programs may be just what you need to get rid of your debt and build a secure financial future.
A debt consolidation program is any service that helps you combine multiple debts in a single payment. Debt consolidation programs can take many different forms, including debt consolidation loans, debt management plans, and debt settlement programs. But all of these programs have one thing in common: they’re designed to help you get out of debt.
If you’re wondering how these programs work or need help figuring out which one is best for you, you’re in the right place. In this article, we’ll cover four different debt consolidation program options and discuss the pros and cons of each.

Debt Consolidation Loans

A debt consolidation loan can give you the chance to combine several debts into one – often at a lower interest rate than the rates you’re paying on all your debts, which means you could save you a lot of money over time. This type of loan could make it easier for you to pay off your debts in 2-5 years by eliminating the stress that often comes with having to juggle multiple payments each month.

Although a debt consolidation loan does come with many perks, there are a few disadvantages, too. For example, while it could help you get out of debt, a debt consolidation loan won’t necessarily help you learn smarter money habits that will prevent you from getting right back into debt again.

Since a debt consolidation loan can treat the symptoms of your financial problems but not the cause, think of it is a tool that gives you some breathing room so you can get back on your feet and design a long-term plan for a financially secure future. It is not magic solution that can fix all of your debt problems for the rest of your life.

You will likely need excellent or good credit in order to take out a debt consolidation loan, so if your credit is suffering, this may not even be an option for you.

ProsYou may pay off your debt quicker.You have a fixed payment schedule.You can simplify the debt payoff process.
ConsThere may be upfront costs involved.If you have a spending problem, this may not be a long-term solution.You need good credit to qualify.

Balance Transfer Cards

A balance transfer card gives you the opportunity to consolidate your credit card debt into a single credit card with a promotional rate that may be as low as 0%. While this may sound like the ultimate solution to credit card debt, you almost always need to pay a balance transfer fee. The balance transfer fee varies from card to card, but most credit cards charge between 2% and 5% of the balance you’re transferring, with a minimum fee of about $5. Fortunately, some balance transfer cards will waive the fee if you make the transfer within a certain number of days of opening the card.

In addition, the promotion rate on balance transfer cards doesn’t last forever. In fact, it typically only lasts about 16 months. After the 16-month period, the card will function like a typical credit card. Your rate will go back up and you’ll still be required to pay off all of your remaining debt. Keep in mind that you’ll likely need excellent or good credit to qualify for a balance transfer card.

Before deciding on a balance transfer card, it’s important to do your research and see what’s available as well as what type of cards you may qualify for. Consider how much you are planning to transfer to the card as well as what you can put toward paying it off each month before making a decision. You should also think about whether you’d like to use the card long-term so you can earn cash back rewards and other perks in the future.

If you choose the right balance transfer card for your needs, pay down a large balance, and land a 0% promotion rate, this option could save you hundreds or even thousands of dollars. Keep in mind that the actual balance transfer itself has no effect on your credit scores. What happens before and after the balance transfer is what impacts your credit.

ProsYou can consolidate your payments.You can save money on interest.You can move your debt to a credit card that has a lower interest rate and more favorable terms.
ConsThere may be a balance transfer fee involved.The low promotion interest rate doesn’t last forever.You could add to your debt if you have a spending problem.

Credit Counseling

Credit counseling agencies could help you get out of debt by designing an affordable monthly payment plan that fits your budget and lifestyle needs. Credit counseling agencies also offer debt management plans for consumers with a significant amount of credit card debt. These plans could help you secure lower interest rates with your creditors and get out of debt faster than you would with minimum payments. However, you may have to pay a fee in order to enroll in a debt management plan (DMP).

Here’s how a DMP works: your credit counselor negotiates a lower interest rate on your credit cards and sets you up with a payment plan that gets you out of debt in 3-6 years. Then, you send monthly payments to your credit counseling agency and they distribute your funds to your creditors until all your debt is paid off.

If you’re interested in pursuing credit counseling, don’t just choose the first credit counseling agency you find. Before working with a credit counseling agency, make sure they are accredited, certified, and have positive reviews on the Better Business Bureau (BBB). Be cautious of any for-profit company that positions themselves as a credit counseling agency as most reputable agencies are non-profits and members of the National Foundation for Credit Counseling or the Financial Counseling Association of America.

Once you do decide on a credit counseling agency, you’ll likely receive assistance with designing a budget, a free review of your credit reports, a discussion on next steps on how to improve your finances, and referrals to other tools and resources that you may benefit from.

You may be eligible for credit counseling if you owe at least $5,000 worth of credit card or personal loan debt. It may be a great way to take control of your debt if you can find a reputable agency and a credit counselor you feel comfortable with that has your best interests in mind.

ProsYou can repay your debt in one, manageable monthly payment.There will be minimal impact on your credit score.You’ll enjoy relief from debt collectors.
ConsA long-term commitment is required.You will need to close your credit card accounts.There won’t be a reduction in principal debt.

Debt Settlement

Debt settlement involves negotiating with your creditors to settle for less than what you owe. While you can do this on your own, it makes more sense to opt for services from a professional debt settlement company like Freedom Debt Relief that can negotiate with creditors on your behalf. Here’s why: A debt negotiator at a debt settlement company has more experience negotiating with creditors so they are able to get larger debt reductions than you could on your own.

If you enroll in a debt settlement program, you’ll deposit money into a special account that you own and control every month. As your balance goes up, the company you hired will contact your creditors to negotiate lower settlement amounts. Once your debt settles, you’ll need to pay a fee that’s 15% to 25% of your total enrolled debt.

With debt settlement, you may be able to settle your debt in only 24 to 48 months. However, this method does come with some drawbacks such as a lower credit score and phone calls from your creditors. In addition, there are no guarantees that you will get reductions on every debt. Results will vary depending on who you owe, how much you owe them, and other factors.

To qualify for debt settlement, you must owe more than $7,500 in debt and be going through something in your life that is preventing you from being able to stay current on your bills. Examples include job loss, divorce, death of a spouse, etc.

ProsYou can significantly reduce your total debt.You’ll pay one small deposit every month.You can pay off debt faster than you’d be able to if you just made minimum payments.
ConsDebt collectors may call you or send you letters more frequently.You may negatively impact your credit score.There may be fees involved.

How to Choose the Right Option for You

While one debt consolidation program may be right for your friend, another one may make more sense for you. Before committing to any of these options, consider how much you owe, what type of debt you have, and how much you can afford to pay each month. Also, think about the advantages and drawbacks of each solution as well as your long-term financial goals. Here’s a comparison chart that can help make your decision a bit easier:

Amount of debt requiredType of debtMonthly costHow long it takes
Debt consolidation loan$1000+Credit card, personal loan, medical, department store card, private student loanMore than current minimum payments 24-60 months
Balance transfer$1000+Credit cardMore than current minimum payments N/A
Credit counseling$5000+Credit card, personal loanLess than or equal to current minimum payments 36-60 months
Debt settlement$7,500+Credit card, personal loan, medical, department store card, private student loan Less than current minimum payments 24-48 months

The reality is that paying off debt can be very challenging, especially when you have to divide your money among several different credit cards, loans, and other debs. By considering the various debt consolidation programs available, you can choose the ideal one for your particular situation and achieve your goal of leading a debt-free life.

Once you pay off your debt via one of these solutions, your goal should be to stay out of debt. You can do so by paying yourself first, creating a budget and sticking to it, eliminating unnecessary expenses such as cable or eating out, and living below your means. Remember, it’s much easier to stay out of debt than it is to get out of it so committing to a debt-free lifestyle is well worth the time, effort, and persistence.